Comment and opinion on the solar industry and its development, low-carbon construction and refurbishment, and Government policy in relation to energy efficiency and renewables.

Tuesday, 3 July 2012

Who Pays for Greener Homes?

Why does the cost of
building a new home matter to house builders?

This may seem like a stupid question, but I’m not talking
about the cost of a pallet of bricks, ton of cement or roll of glass wool. I’m
talking about additional costs from meeting tighter environmental
regulations.

Specifically, why do developers of new homes care about the higher building
costs from building to ever higher standards of energy efficiency?Still seem like a stupid question?Let me explain further.

Let’s also assume that house builders are price-takers.The price of a house is largely set by the
“second-hand” market because buyers always have the choice to buy an existing
rather than a new home.So if building
costs go up and prices stay the same the house builder’s profits are squeezed,
right?

Well, not necessarily.If changes to regulations are published well in advance of coming into
force, and if regulations are applied consistently to all developers, then the
price that any developer is prepared to pay for land should fall to preserve
their profit margin.Since all buyers of
land build to the same regulations, they are all affected equally.All the “pain” of the new regulations will
fall onto the landowner selling to the developer.

The value of an acre of agricultural land is around £5,000
per acre.The same land with planning
permission to build houses would sell for millions of pounds per acre. The windfall that accrues to
landowners when planning permission is granted is so massive that a squeeze on their
margins is of little consequence to their decision to sell and certainly would not win them any
sympathy from anyone else.

So can anyone answer the question – why do house builders
care about costs?